1) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection.
C) free riding.
D) costly state verification.
2) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free riding
D) free riding; costly state verification
3) Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender”s relative lack of information about the borrower”s potential returns and risks of his investment activities.
B) the lender”s inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.
C) the borrower”s lack of incentive to seek a loan for highly risky investments.
D) the borrower”s lack of good options for obtaining funds.